India must remove investment barriers for growth: IMF

India needs to remove barriers to investment, maintain the credibility of its monetary and fiscal policies and keep the budget deficit reined in to return to a high growth path, according to the International Monetary Fund (IMF).

India needs to remove barriers to investment, maintain the credibility of its monetary and fiscal policies and keep the budget deficit reined in to return to a high growth path, according to the International Monetary Fund (IMF).

A number of domestic factors have played an important role in India’s growth slowing down quite sharply, Rupa Duttagupta, deputy chief of IMF World Economic Outlook Division, told reporters after IMF’s latest projections lowered India’s growth for fiscal 2013 to 3.8 percent.

The IMF’s Fall 2013 World Economic Outlook (WEO) expects India to gradually pick up to 5.1 percent next year, again one percentage point lower than projected in July, but “on the structural side, we still see investment recovery to be very slow”.

“A lot of supply-side bottlenecks, say constraints in the mining sector, in the power sector, as well as, in general, investment sentiment has been very weak in terms of slow project approvals,” Duttagupta said.

“These things have played a role in keeping investment still pretty subdued. Also, given much tighter monetary conditions, given the higher inflation, higher interest rates have played a role in keeping consumption demand pretty subdued,” she said.

But Duttagupta noted “more recently the exchange rate has depreciated significantly in real effective terms, and agricultural production is also undergoing a strong rebound”.

“So, built on these factors and high-frequency indicators show that even investment growth is picking up, we expect growth to pick up next year.”

Noting that risks of higher capital outflows once unconventional policies unwind are always there, Dasgupta said, it was very important for India and Indonesia “to sort of maintain the credibility on both their monetary and fiscal policies”.

The central banks of both countries in recent months have raised their interest rates given higher inflation “which helps because inflation is still very high in both countries”, she said.

“For India, also, an important priority would be to make sure that the fiscal deficit target for the FY2013 budget is maintained even if additional measures are needed,” Duttagupta said.

Olivier Blanchard, Economic Counsellor and Director of the Research Department, also stressed the need for urgent structural reforms “from rebalancing toward consumption in China to removing barriers to investment in India or Brazil.”